Posts Tagged ‘Financial uncertainty’

People have been wondering what the stock market will do since they first began trading under the buttonwood tree in lower Manhattan.

I read an article – one of a zillion such articles that always get multiple opinions from people who invariably prove they never had a clue to begin with – yesterday by Gil Weinreich, writing for AdvisorOne, You can find a link to it on the IFG Facebook page; and this from the article caught my eye:

“The most recent Chicago Booth/Kellogg School Financial Trust Index indicates that 47% of the public expects the stock market to plunge in the next 12 weeks, according to Wharton professor Olivia Mitchell. Mitchell’s own portfolio has outperformed the stock market since 1999, when she put all her investments in Treasury inflation-protected securities. Her difficulty today, however, is figuring out what to do now that TIPS are paying negative returns.”

The professor put ALL her investments in TIPS. Translation: She was ‘timing the market’. Not the stock market, but the bond market. And, she’s got lucky. But, there was a price. Those who ride high on one side are often in danger of getting ‘whipsawed’ on the other.

The market giveth and the market taketh away.

The professor isn’t alone. Many intelligent people – the same people who would never build a home without a blueprint, or launch a business without a well thought-out business plan – often make investment decisions and asset allocations based on an outlook, which means it’s virtually always without a long-term written investment plan. It’s important to note there is NO professionally-written plan on earth, for a home, business, or investments, that would use only one material, or concentrate all risk into one sector.

Risk concentration isn’t a strategy. It’s a guess. It’s a hope. Yet, too many Americans do it all the time. It’s called ‘chasing returns’.

It doesn’t work.

It’s never worked.

Some point to past successes, similar to the example above; but, those always end-up being short-term. When you calculate the returns over time – and one might argue the professor’s track record since ’99 isn’t exactly short-term – it’s also true that returns are now negative and her investment life isn’t over yet – and won’t be for many years to come.

Anyone who’s attended a large gathering of financial types knows the room is always filled with better-than-average investors; yet, few – although the number may be closer to ‘none’ – can even beat the indexes consistently.

It’s not about being brilliant; it’s about being smart. Being smart really all about knowing what you don’t know… it’s about managing risk, not money… you just do it with money…. And market risk is only one of them.

Jim

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. Opinions expressed are those of the author. IFG does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

Risk questionnaires have played a major role in retirement and investment planning for as long as I can remember; and I’ve used them no less religiously than any other advisor. Frankly, I’ve always felt they were a little stupid.

Elmer Duckhunter walks into Brainy Smartsuit’s office at Behemoth Securities. It’s a beautiful place, full of mahogany with lots of beautiful brochures in the lobby. Brainy has been successful at Behemoth, gaining promotion to Sr. Vice President after selling more Secure Your Future product than anyone else in the office using the “Secret in a Box” software supplied by the product wholesaler.

“How can I help you?”, Brainy asks.

“Well,” says Elmer, “I have a lot of money from all those Tractor Pulls I won and I think it’s time I began investing for my future. What should I invest in?”

“I think I can help you, but first I have to know more about you!”

“Makes sense. What do you want to know?”

Brainy pulls out the Behemoth Risk Assessment questionnaire. “First, I’d like to know a little about how you feel about investing.”

“Okay.” Elmer settles in. “How many questions are there?”

Brainy smiles, “Just six.”

“Six? You can learn everything you need to know about me with just six questions?”

“Trust me. This is very scientific, “says Brainy.

“Okay.”

Brainy begins. “On a scale of zero to 10, how much risk do you feel you can handle?”

“I don’t know. What would a ‘five’ feel like?”, asks Elmer.

“Just pick one that you feel comfortable with, says Brainy. “The people who prepare these know what they’re doing.”

Elmer thinks for a second. “Well, back in 2007 I was a 9, but after the crash I was a 2. Now, I don’t know what I am. That’s why I’m here!”

“Well, I can’t tell you how much risk to take until you tell me how much risk you want; then, I can tell you what you told me and we’ll have the answer!”

“Huh?”

They both look at each other, then Elmer continues, “How much risk do I want? Seems to me you should be telling me how much risk I need or don’t need!”

“But what if it’s more than you want?”, asks Brainy.

“I don’t know how much I want. I need to know how much I should or should not have?

Brainy perks up. “Now we’re getting somewhere. What are your goals?”

“Simple”, says Elmer, “to retire with as much money as possible with as little risk as necessary.”

“How much is that?”

“How should I know? You tell me.”

Brainy senses a lack of forward progress. “Let’s come back to that. Try this one: If your portfolio went down, what would you do?”

“I’d probably ask you for advice! Isn’t that your job?” Elmer’s beginning to wonder if Brainy Smartsuit is so smart after all. “Why are you asking me all this. I just want to know what I should be doing!”

Brainy comes clean. “We have regulatory compliance concerns. We have to make sure what we recommend is consistent with how you feel about investing.”

“I’d rather have advice that’s consistent with what I need,” says Elmer. Are you protecting me or your firm?

“Well, actually, both…”

“There are six of these?” Elmer’s fed up. He puts on his duck hunter cap with earflaps, and stomps out of the office.

Maybe these questionnaires can shed some light about attitudes; but, they don’t tell Elmer what he needs to know. Elmer just wants to know what he should be doing and why.

Once he understands what and why, the rest gets easier. Fear can exist only where there’s a knowledge vacuum. When knowledge replaces ignorance, fear dissipates and understanding prevails.

Maybe questionnaires have zero to do with long term success for the client; but, they maybe do help sell more Secure Your Future product.

Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG provides investment and fiduciary consulting and wealth management services for individual investors. Opinions expressed are solely those of the author and fictitious names were created solely for their entertainment value and are not meant to represent any person or organization living or dead. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. IFG also does not provide tax or legal advice. The reader should seek competent counsel to address those issues. Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan. The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com

As much as I’ve been an unabashed critic of most of the financial media, I can’t help but noting that Money magazine’s October Retirement Guide issue has some excellent articles about preparing for retirement; and I recommend picking up a hard copy to pass around to family members. Articles in this issue discuss things most people simply don’t think about in advance.

Back in 2005, it became obvious that my parents back in Florida could no longer take care of themselves. Mom had broken a hip and was in a health center recovering from surgery – and the anesthesia didn’t help the Alzheimer’s which was then in its early stages. Meanwhile, dad, who was living alone while mom was in rehab, could barely get around. He had lung cancer, though he hadn’t told us about it and I’m not sure he even knew.

My wife and I made three trips between California and Florida over a six week period: Arranging financial and legal matters, home care for dad and mom when she arrived, selling their home, and prepping our home for their arrival, i.e., outfitting bedrooms, bathrooms, etc., and arranging for in-home care in our home for them when they arrived.

There was a lot we didn’t know and we had to learn on the fly. This issue of Money – look for the Retirement Guide sub-heading – is certainly worth reading and talking about with your family. It also asks some good questions like, “Who will change your light bulbs when you can’t? Do you trust them?” The answers may not be as easy as you think.

If you can’t wait to get a hard copy, you can read some of the articles here.

Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG provides investment and fiduciary consulting and wealth management services for individual investors. Opinions expressed are solely those of the author and fictitious names were created solely for their entertainment value and are not meant to represent any person or organization living or dead. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. IFG also does not provide tax or legal advice. The reader should seek competent counsel to address those issues. Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan. The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com

When the Fed announced an open-ended QE3, the stock market rallied. In fact, the market’s been trending up since 2009 after the meltdown when all the government spending began. But, was that good? Have those stock gains been real?

Since the meltdown, people have been chasing returns whereever they could find them, whether it was with high dividend-paying stocks or buying gold – a demand largely fueled by all those tv commercials.

The financial industry, of course, has responded to both fear and greed by packaging yet another series of products, some of which come with either high or hidden costs… and sometimes both.

The question, of course, is whether all these “black box” solutions are really the answer… or whether the ‘basics’ are still relevant.

After all, companies that declare dividends are adjusting the price of the stock downward to compensate – you could arguably simply buy growth stocks that don’t pay dividends and simply sell what you need for income and still arrive at the same result!

And, while gold has increased in value – in terms of the numbers of pictures of presidents you receive for each ounce – have you really received more value when adjusted for inflation? Some say ‘yes’ but a J.P. Morgan study says something else.

We have more about this in our IFG Insights E-zine, which is appeared earlier this morning and is available in our archive.

It’s my guess much of the increase we’ve seen in virtually all equity categories, have been more nominal than real and are driven by the growth of debt.

We’ll see, won’t we?

Jim

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. IFG does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

If you’re wondering – and you probably aren’t, and rightly so – why nothing is being done in Washington, it’s because it’s election time; but, most people don’t pay much attention during the summer months because, unlike politicians, they actually have lives.

Conventional wisdom says that most people won’t begin paying attention until after Labor Day, which means ‘conventional wisdom’ assumes most Americans can afford to take vacations and doesn’t mind unemployment.

“These are not my figures I’m quoting. They’re from someone who knows what he’s talking about.”

(anonymous congressman during a debate)

Of course, the current spending debate isn’t new. Much as we’re accessing capital from China today, we were doing much the same thing as far back as the 1830s, still dependent on British capital despite the Revolutionary War and the War of 1812. Back then, while foreign capital was used in an attempt to stimulate economic development, interruptions in the availability of credit during times of uncertainty often had ruinous consequences for American borrowers.[1] The inflow of foreign capital, combined with the expansion of the paper money supply drove up prices making American products less desirable on the foreign market. At the same time, the profligate spending of several states left them deeply in debt. This was also a time when Americans felt uneasy about the international banking system – a machine that few Americans only dimly understood.[2] By the time Andrew Jackson left office in 1837, Eastern cities were experiencing bank failures and factory closings, making the U.S. dependence on foreign capital more apparent than ever.

We’ve been here before.

“We’ll burn that bridge when we get to it.”

(Anonymous)

Jim Lorenzen, CFP®, AIF®

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

We’ve been in choppy times since 2008. Many people feel the markets are ‘uncertain’ and have been avoiding the markets until they “see what the market will do”. It’s an old mantra I remember hearing when I began in this business more than twenty years ago. The markets were uncertain then, too. Problem is, markets are always uncertain.

Has avoidance worked? Not likely. Investors who wait until they feel good about the markets are, by definition, waiting until the market has gone up – they buy ‘high’, which means they usually are overpaying, rather than underpaying, for their investments.

Investors who have self-discipline, or lucky enough to be in auto-enrollment, automatic increase company retirement plans, have probably done a little better.

Let’s use a little hypothetical mathematical exercise to illustrate the point. Let’s compare two investors:

One has $20,000 in a retirement plan but stops investing just as the market starts to go down…. And won’t invest again until the market ‘comes back’.

The other investor who has NO money in a retirement plan, but actually starts investing when everyone else is freezing up!

Now let’s assume a market that starts going down and takes six years to realize a 30% loss, then ten years just to get back to even.

Both investors end-up with the same amount invested in the same market, represented with a starting price of 50.

Who won?

Hmmm. Maybe buying ‘on the cheap’ is good, ya’ think?

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors.

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. IFG does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

I attended a 401(k) Recon conference north of Los Angeles last week and was amazed, though not totally surprised, to hear a few very interesting points.

One speaker relayed a story about one company’s 401(k) enrollment meeting where 100% – yes, everyone – said they wanted to enroll in the company’s 401(k) plan. They all were going through the materials and even choosing allocations they felt were appropriate – and all them were excited about starting to save for their retirement!

Would you like to guess how many actually followed through and actually participated? 3%. That’s right; only three in one hundred actually did it. Education didn’t seem to help, at least in that particular case, despite all the glowing post-meeting comments.

Benjamin Graham, the ‘dean’ of value investing who taught Warren Buffett at Columbia University, once said that behavior, more than investment choices, represent the largest impediment to financial success for most Americans; and the data seems to bear that out.

Poor savings habits, poor investor performance due to behavior, and paralysis often due to too many choices create roadblocks many have trouble overcoming.

Maybe the best gauge of investor success (or failure) might be whether they are ‘on track’ to a successful retirement, which some define as replacing 75% of preretirement income at age 67. According to a study – I think it was conducted by Mass Mutual – revealed that only 15% of American workers are ‘on track’. Even without my HP12-C, it’s obvious that means 85% are not.

It’s not rocket science. It’s about three simple components: time, savings rates, and return. Time is the only component that constantly declines; and, as it does, it creates pressure on the other two. When procrastination behavior impedes one of those, all the pressure falls on investment return. This may be why some people reach a point where they begin making the risky choices they live to regret.

I’ve spoken about financial literacy before and how our schools need to do a better job – I even once met a CPA who didn’t know the difference between gain and yield. When an accountant doesn’t know, it explains the deficiencies the rest America’s workers are experiencing.

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. IFG does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.